New-home sales rise after hefty downward revisions

September sales rise 4.8%, but at second-lowest level in 10 years

WASHINGTON (MarketWatch) -- Sales of new homes rebounded in September from summer sales levels that were much weaker than previously reported, the Commerce Department reported Thursday.

Sales increased 4.8% to a seasonally adjusted annual rate of 770,000 from a revised 735,000 in August, an 11-year low. Previously, August's sales had been reported at a 795,000 pace. Read the full report.

September's sales were slightly higher than the 758,000 pace expected by economists surveyed by MarketWatch. See Economic Calendar.

'Take this one with a large truckload of salt.'
Michael Gregory, BMI Capital Markets.

The three previous months were revised sharply lower, which means the housing market was much weaker in the middle of the year than previous believed, and no one believed it was strong.

Investors focused on the 4.8% monthly gain, pushing up the homebuilders' stocks. See full story.

"The crash continues," wrote Ian Shepherdson, chief economist for High Frequency Economics. Sales fell at a 35% annualized pace in the third quarter, he said.

"Even accounting for September's rebound, the latest sales level is still the second lowest in more than a decade," said Michael Gregory, an economist for BMO Capital Markets, in a note to clients.

The large revisions highlight the low confidence that government statisticians have in the monthly report and the frequent large revisions it undergoes. The report is updated for several months as the government gets more responses from home builders to its surveys.

"Take this one with a large truck load of salt," wrote Richard Moody, chief economist for Mission Residential.

Longer trends do a better job of showing the reality of the housing market than volatile monthly numbers. Sales of new homes are down 23.3% in the past year.

The sales figures do not account for canceled sales contracts, which have surged in recent months, especially since the seizing up of some mortgage markets. Builders have reported cancellation rates as high as 68%.

Combined, sales of all single-family homes, both existing and new, fell 6.8% in September to 5.15 million annualized, the lowest total since January 1998. That's the second-largest monthly decline in 19 years.

Many buyers are unable to find financing at the rate they want. Mortgages for subprime and Alt-A loans have become almost impossible to find outside of government programs. The market for jumbo loans above $417,000 also dried up in August and September.

The "financial chaos" is hurting the market, said Robert Brusca, chief economist for FAO Economics in an interview with the MarketWatch Radio Network. Listen to the complete interview.

Details

Inventories of new homes on the market fell 1.5% to 523,000, representing an 8.3-month supply, down from 9 months in August. The inventory of completed homes continued to rise, however.

New construction on single-family homes has plunged 31% in the past year, according to a separate report released earlier. Builders are frantically trying to reduce their inventories.

Supply of existing homes could skyrocket. A congressional study found that as many as 2 million homeowners could lose their homes in the next two years to foreclosure due to higher interest rate payments as their adjustable-rate mortgage resets. See full story.

Sales of new homes rose in two of four regions in September, with sales in the West rising 38% after a 23% drop in August. Sales fell 19.5% in the Midwest to the slowest pace in 16 years. Sales dropped 6.6% in the Northeast and were essentially flat in the South, rising 0.5%.

The median sales price of $238,000 was up 5% compared with a year earlier. The median sales price reflects the mix of homes sold in a month.

On Wednesday, the National Association of Realtors reported an 8% drop in existing-home sales, while inventories of existing single-family homes rose to a nearly 20-year high. See full story.

The government cautions that its housing data are subject to large sampling and other statistical errors. Large revisions are common. The standard error of 10.3% is so high, in fact, that the government cannot be sure in most months whether sales rose or fell.

It can take up to five months for a trend in sales to emerge. New-home sales have averaged 792,000 per month annualized over the past five months, compared with 820,000 in the five months ending in August. That's the lowest in 10 years.

Home builders have piled on incentives, including offering free vacations and new cars, to sell homes and reduce inventories. Such incentives are not subtracted from the sales price reported to the government.

Sales are reported when a contract is signed, not at the closing of the sale. Home builders have reported a large increase in cancellations in recent months, with some builders reporting that 50% of orders are cancelled. Cancellations are not reflected in the government data, so the reported sales are likely overstated, and inventories are unstated.

In other reports released Thursday, the Commerce Department said orders for durable goods fell 1.7% as demand for defense goods dropped. Outside of defense, orders rose 0.7%. See full story.

The Labor Department said filings for unemployment benefits fell by 8,000 last week to 331,000, while the less-volatile four-week average rose to a seven-week high. See full story.

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